How Do Reverse Mortgages Work?

A reverse mortgage works by allowing homeowners aged 62 or older to obtain cash by tapping into the equity in their homes. This provides older Americans with a means for increasing income or cash flow while maintaining the home in which they live.

In order to be eligible for a reverse mortgage, you must own your home and the home must be your primary residence. Homeowners with balances on their mortgages qualify but the mortgage must be paid off in full immediately with the proceeds from the reverse mortgage loan so that no outstanding loan remains on the home. The reverse mortgage lender must have the only lien on the property.

m1The amount of cash you are eligible to receive in a reverse mortgage is dependent on your age, the market value of your home and current interest rates as well as your income, expenses and credit.

In addition to determining how much cash you can obtain through a reverse mortgage, you’ll also need to determine how you want to receive your money. You can opt for a single lump-sum payment, a series of monthly payments or you can withdraw money as desired in a fashion similar to a line of credit. Monthly payment options will be determined based on the length of time you are expected to live in your home and will be administered on a regular basis as long as you remain in your home or they can be set up to cover a fixed term. Interest will accrue only on the amount of the loan that is dispersed to you.

The payments received from a reverse mortgage are not taxable and do not affect Social Security or Medicare benefits. There are generally no restrictions on how the money is used, unless you opt for a single-purpose reverse mortgage, which will restrict what the money can be used for.

Since homeowners retain full ownership of the home, real estate taxes and homeowners insurance must be paid by the homeowner. Additionally, the homeowner is responsible for upkeep and maintenance on the property.

Repayment of a reverse mortgage loan is not required until the last surviving borrower is no longer living in the house or if the borrower falls behind of property taxes, insurance payments or maintenance costs. Once this occurs, the home can be sold to repay the loan or if a family member wishes to retain the home, repayment can be made in some other way and the home does not need to be sold. If sold, the borrower is not responsible for any amount due on the loan over and above the amount received on the sale of the house. However, if the home is retained and payment will be made on the loan through other means, the loan amount is due in full, no matter what the current value of the home may be.



What Types of Reverse Mortgage Products Are Available?

If you are considering a reverse mortgage, you may be wondering what types of reverse mortgage products are available. There are two primary types of reverse mortgages – those backed by the federal government and those issued by private lenders. Additionally, there are single-purpose reverse mortgages, which restrict usage to a specific purpose but carry lower costs and fees.

Here’s some more info about the different types of reverse mortgages available:


Home Equity Conversion Mortgages (HECMs) are reverse mortgages that are regulated by the U.S. Department of Housing and Urban Development (HUD) and insured by the Federal Housing Administration (FHA), which is a part of HUD. These loans are not issued by the government, but are issued by private lenders and insured by the FHA. Almost all reverse mortgages currently offered are HECMs.

HECMs provide the option to receive money as a lump sum payment, in monthly installments or as a line of credit. Fixed interest rate loans are only available with the lump-sum payment option, while adjustable interest rate options apply to other payment options.

HECMs include a number of consumer protections. With an HECM, the borrower is charged an insurance fee which amounts to a small percentage of the loan balance. This insurance protects the borrower if the lender is not able to make payments or the value of the home does not cover the full loan balance due when sold. In addition to requiring this insurance fee on HECM loans, borrowers are required to receive third-party counseling prior to entering into a loan agreement.

Proprietary Reverse Mortgages

Although most reverse mortgages issued today in America are HECMs, there are a small percentage of proprietary reverse mortgages available. A proprietary reverse mortgage is privately insured by the bank or mortgage company that offers the loan. For the most part, these are generally issued on higher-valued homes ($750,000+), and for that reason, they are sometimes referred to as jumbo reverse mortgages.

The primary difference between an HECM and a proprietary reverse mortgage is how they are insured. HECMs are insured by the FHA, a government agency, while proprietary reverse mortgages are privately insured by the lender. Other than that, the way each works is essentially the same. In fact, even though proprietary reverse mortgages are not subject to the same government regulations as HECMs, most incorporate the same rules to provide consumer protection, including third-party counseling prior to entering into a loan agreement.

Single-Purpose Reverse Mortgages

Although not considered to be an HECM loan, a single-purpose reverse mortgage is generally issued by either a state or local government agency, or a non-profit organization. These reverse mortgages can only be used for a specific purpose and may only be available in some areas for homeowners with low to moderate income levels. The loans generally come with lower costs than other types of reverse mortgages.

Is A Reverse Mortgage Right For Me?

While a reverse mortgage can be an attractive option for those in need of additional income or who want access to excess cash rather than having equity tied up in their home, this loan instrument is not right for everyone. The key is to know the facts about reverse mortgages, and then to speak to a reverse mortgage originator you can trust to answer any additional questions you may have. Together you can determine if a reverse mortgage will most effectively meet your financial needs.

In order to decide if a reverse mortgage is right for you, here are a few questions you need to ask yourself?

Are you 62 or older?

If the answer is “no” then you are not eligible for a reverse mortgage, but if you are 62 or older, then a reverse mortgage may be a viable solution for obtaining cash while still retaining your home.

Are there other options for getting the cash you need?

There’s no denying that reverse mortgages come with relatively high upfront fees, as well as other ongoing costs such as mortgage insurance premiums. If you have another way of accessing the money you need with lower costs, you may find that a reverse mortgage is not the best option for you. However, there are a number of benefits to reverse mortgages that other financing options don’t offer, such as the fact that your credit worthiness and income do not factor into your eligibility to receive a loan.

Are you struggling to make your monthly payments?

If you need more income and do not have a means of increasing what’s coming in each month to pay your bills, a reverse mortgage may be a great option. By tapping into your home’s equity, you can obtain the extra income you need on a monthly or as-needed basis and the income you receive is not taxable. The added income will also not jeopardize any Social Security or Medicare benefits. One thing to keep in mind, however, is that you will be responsible for keeping up with your property taxes and insurance and maintenance costs of your home. If, for some reason, you fail to make these payments as scheduled, you may be subject to foreclosure by your lender.

Do you need the money now or would you rather leave your assets to your heirs?

One big question that often comes up when people consider a reverse mortgage is determining whether it’s more important to have some extra money now or to leave what you have to your heirs when you’re gone. If you need the money to live on or would rather enjoy the time you have left by having some extra cash to travel, fund your grandson’s college education or fix up your home so you can enjoy it while you’re living in it, then a reverse mortgage can provide you with the money you need while you can still take advantage of it. If, however, it’s more important to leave your assets to your heirs when you die, then you may want to think twice about getting a reverse mortgage because your home will have to be sold at that time to pay off the loan, or your heirs will have to pay off the loan in some other way if they would rather keep the home than sell it.

Is there someone living with you?

If you do not live alone, it’s important to consider whose name(s) are on the loan agreement when you get a reverse mortgage. If just one spouse is named as a borrower and he or she dies, the loan comes due at that time and the house may have to be sold to pay off the loan. However, if both spouses are named as borrowers on the loan, payment on the loan will not be due until both spouses have passed away or have otherwise permanently moved out of the home.

There are many details to consider when deciding if a reverse mortgage is right for you. For more information about reverse mortgages or to schedule an appointment so you can better determine if a reverse mortgage is the best choice to meet your financial needs, call 1-800-827-1794

This material is not from HUD or FHA and has not been approved by HUD or a government agency.

As with any loan there are risks associated with a reverse mortgage.  The right to remain in your home is contingent on complying with reverse mortgage loan terms and it is possible to lose your home if you do not comply with the terms of the reverse mortgage such as keeping current with property taxes, insurance and maintenance costs.